George Ritchie & Searle Mitnick: Protecting Developers in Lease Agreements

In this conversation, George Ritchie and Searle Mitnick discuss the complexities of real estate litigation, focusing on the challenges developers face when landlords become uncooperative. They explore the importance of detailed contracts, regulatory compliance, and the necessity of estoppel certificates for financing. The discussion emphasizes the role of good faith and fair dealing in contractual relationships, providing insights for both developers and landlords.

Mitnick, Searle E. | Gordon Feinblatt LLC
Ritchie, George F. | Gordon Feinblatt LLC

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Litigation | Gordon Feinblatt LLC

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Episode Transcript

SPEAKER_01 (00:04):
Hello, everyone, and welcome back to another episode
of the Gordon Feinblatt Podcast.
The conversation we are bringingto you today will discuss the
complexities of real estatelitigation with a focus on some
challenges developers may faceif landlords become
uncooperative.
Our attorneys, George Ritchie,litigation attorney, and Cyril

(00:24):
Mitnick, real estate attorney,explore the importance of
detailed contracts, regulatorycompliance, and the necessity of
estoppel certificates forfinancing.
This discussion emphasizes therole of good faith and fair
dealing in contractualrelationships, providing
insights for both developers andlandlords.
This episode is a great lessonfor anyone in the real estate

(00:45):
space, whether you are adeveloper, a landlord, property
owner, investor, or a realestate attorney yourself.
We think there's usefulinformation in here for
everyone.
As always, if you need legalassistance or have any
questions, you can find contactinformation for the attorneys
featured in this episode, aswell as information about the
firm Hi, everyone.

SPEAKER_00 (01:13):
Thanks so much for tuning in.
My name is George Ritchie.
I am a litigation attorney andhead of the litigation
department with GordonFeinblatt, and I'm joined today
by my colleague, Cyril Mitnick.

SPEAKER_02 (01:26):
Hi, everybody.
I'm Cyril Mitnick.
I'm a member of Gordon Feinblattin the Real Estate Practice
Group, and I'm happy to be herewith you today.

SPEAKER_00 (01:36):
Sir, good afternoon.
Good afternoon, George.
I want to paint a picture foryou that I hope we can address
in the next 15 or 20 minutes forour audience.
And it's really a grim pictureof the litigation world.
Imagine a developer who has aproject for which they have

(01:56):
leased a commercial real estate.
And although the project is notfinished at the time they enter
into the lease, and this couldalso be a lease option, by the
way, while they're developingthat project, getting financing,
getting construction underway,et cetera, the landlord decides
for whatever reason that theydon't like the project anymore

(02:18):
and stopped cooperating with thedeveloper and helping the
developer get necessarydocuments, permits, etc.
that are required for theproject to get underway.
And the developer is nowmillions of dollars into this
project and is running out oftime.
And probably most importantly,the commercial world is changing

(02:39):
on them, such that if they don'tget the project done within a
certain amount of time, it mayno longer be viable from a
commercial situation.
As often happens, the developerfiles suit.
There's a dispute between thedeveloper and the landowner as
to what the landowner really hadto do to cooperate with the

(03:00):
developer in doing the project.
And trials upcoming and hundredsof thousands of dollars have
been spent and the commercialopportunity is slipping away.
This is a situation that I'veencountered and others have
encountered in the past.
And my question for you as ourreal estate expert is, What can
the developer, and we can flipit around to talk about the

(03:21):
landlord too, but what can theseparties do to protect themselves
in a lease or lease optionsituation so that they can feel
reasonably secure that the partyon the other side will cooperate
with the items that need to bedone towards a successful
development?

SPEAKER_02 (03:39):
So I think really we could approach this as we would
with initially looking at anykind of a contract.
the contracting parties want toget what they bargained for.
And the way to maximize thatexpectation is to be as detailed

(04:02):
as possible in the document sothat the other party, if it gets
buyers or sellers or landlordsor tenants remorse, doesn't have
room to wiggle out of it.
So we try to include everythingthat we can.

(04:24):
Often this arises in an optioncontext.
We see it very typically thesedays in renewable energy
context, but it can applyanywhere, but parties will,
enter into an option agreement,whereby we'll call him the

(04:46):
landowner, executes an optionagreement with a prospective
tenant who will lease theproperty for whatever purpose.
Let's stick with our energydeal.
Suppose it's a solar developerand they're going to develop the

(05:07):
property, get the necessarypermits, get the necessary
financing, investment, etcetera, so that they can erect
their solar panels and sell theenergy generated to the utility
company.
or to other consumers.
So the parties will enter into alease option agreement.

(05:33):
Often we will see agreementsthat say that if the option is
exercised, the parties willenter into a lease which
contains the following terms.
What's the rent?
Is there a different rent duringthe construction period and the
operation period?
How long is the term of thelease?

(05:54):
Is it renewable?
And so on.
And sometimes in developmentsand not only with renewable
energy transactions, aprospective tenant will acquire
the site control of a largeparcel, but give itself the

(06:20):
option of the commercial theprospective commercial tenant
will take site control of alarge parcel but with the
expectation that after it doesits due diligence and its
studies it can reduce it to acertain specific area of the
larger parcel when the documentis not sufficiently detailed it

(06:47):
gives a wide range of latitudein this case to the landowner to
get out of it if the landownerdoesn't like the deal.
And the way to avoid that is tohave, one way is to put in the

(07:10):
option agreement all the termsof the lease that you can
imagine, but a better way is toactually negotiate the lease at
that point.
fight out all the battles overall the issues, incorporate them
in the lease and say, if theoption is exercised, this is the
lease.

(07:32):
And sometimes the partiescontemplate that at that point,
the landlord and the tenant willsign the lease.
I like to do it even more naileddown than that.
And that is to provide in theoption agreement that this lease

(07:52):
attached automatically becomesthe lease in effect between the
parties and that doing it thatway gives a higher degree of
expectation that in this casethe tenant we'll get what it
bargained

SPEAKER_00 (08:07):
for.
So you mentioned the solarcontext.
As we know, these deals can bepretty fluid and dynamic.
The parties in year one mightthink that this project is going
to be of a certain size and acertain location, and three or
four years later, they find outthat the local planning
authorities, whether at thecounty or the state level, have
different ideas.

(08:28):
How important is it forregulatory counsel and or the
regulatory folks dealing withthese agencies to keep their
attorneys up to date on thosedeveloping issues as these deals
get hammered

SPEAKER_02 (08:42):
out?
It's essential because theregulatory folks have to present
a case to the authorities, oftenthe Public Service Commission
and or local authorities andthey may have different ideas.
Often we find these in the solarcontext dealing with

(09:04):
agricultural property anddealing with large farms.
And again, the solar developerin our example would like to
maximize its flexibility.
So it will say that we canexercise the option as to the
entire site or any portionthereof, and pushing back, the

(09:29):
landowner will want to know thatit's at least going to be a
minimum number of acres so thatit will have a viable project in
terms of the rent that it willreceive.

SPEAKER_00 (09:39):
Can a party, say in this case the developer, include
a clause in the lease or thelease option that recognizes the
purpose of the project?
and then has some language thatsays that the landlord in this
case will take other such stepsas is reasonably necessary to

(10:00):
carry out the purpose of thatproject?

SPEAKER_02 (10:03):
The answer is yes.
But I like to put that in afterwe put in all the details that
we can think of, and then wehave that clause and anything
else reasonably required by thetenant to enable the party, the
tenant to fulfill the purpose.
And a good lease normally sayswhat the purpose is, whether

(10:25):
it's a convenience store, thepurpose is to run a convenience
store.
For a commercial office tenant,that's the purpose.
So you want the obligations ofthe landlord tied to the
purpose, which should bearticulated in the

SPEAKER_00 (10:45):
document.
There's a well-known case out ofthe Maryland appellate courts.
I think it went to what used tobe called the Court of Special
Appeals.

SPEAKER_02 (10:53):
Oh, I remember that, George.

SPEAKER_00 (10:55):
Yeah.
The Intermediate Appellate Courtand now the Supreme Court of
Maryland.
But the case name is CRRSC Tower1 versus RSC Tower 1.
Pretty boring, vanilla name.
But in that case, the developerwanted to build apartment
buildings on the land that theywere leasing and in order to do

(11:18):
that of course they had to getfinancing from lenders and one
of the requirements from thelenders was that they provide
estoppel certificates to thelenders and they needed to get
those certificates of coursefrom the owner Would, in your
scenario, what you'redescribing, would it be possible
to include that requirement thatupon a reasonable request and

(11:41):
within a reasonable amount oftime that a property owner would
supply a certificate, astop-loss certificate like this
to a developer?

SPEAKER_02 (11:52):
It's essential if the developer intends to finance
its project.
And typically, we will providewhen we're representing the
developer that the landlord willprovide an estoppel certificate.

(12:14):
Ideally, we'll say in form andsubstance satisfactory to the
lender.
There will sometimes be pushbackfrom the landlord who might want
to say what it's not willing togive.
The problem in that case wasthat the estoppel certificate

(12:38):
was specified in the lease, butthe defaulting party didn't want
to give it.
There, they...
A nuance on that, however, isthis.
As I said before, I like toattach forms of documents to my

(13:00):
option agreement.
So I could attach a form ofoption agreement, of estoppel
certificate.
But suppose the lender has adifferent form and doesn't like
my form.
So if one thinks of it, the bestway to do it, I guess, is to
attach a form but provide in thedocument itself, in the lease

(13:25):
itself that the parties will,they will change the estoppel
certificate in conformance withthe requirements of a lender.

SPEAKER_00 (13:36):
And in that case, in fact, first the trial court,
then the intermediate appellatecourt, and ultimately the court
of appeals upheld rulings thatrequired the landlord to provide
those certificates.
It seemed clear from the factsdescribed in that case that the
refusal to provide them wasstrategic, that the landlord

(13:58):
didn't like the deal they hadstruck, and they were looking to
essentially squeeze thedeveloper out by hoping that as
litigation dragged on, that themarket for this apartment
building would evaporate and thedeveloper would simply walk
away.
My experience in general inMaryland state and federal
courts is that although nocircumstance can be fully

(14:21):
contemplated at the outset, Iguess, of contracting, judges in
the state will will interpretagreements to require reasonable
action by landlords or tenants,depending on who's seeking
redress there, as long as thoserequests are reasonably

(14:41):
consistent with the clearlanguage of the agreement.
How do you feel about

SPEAKER_02 (14:46):
that?
I think that's a good thing.
And in other cases, in differentcontexts, but the idea is pretty
much the same.
Courts have imposed byimplication an obligation of
good faith and fair dealing.
And that is an appropriateconcept, I think, for situations

(15:09):
like this.
Yes, in the case that you weretalking about, it was clear that
the party had remorse, if youwill, about the deal and was
trying to wiggle out of it inany way it could.
But the court didn't let him getaway with it.
And that case was up and downnumerous times, cost many, many,

(15:33):
must have cost many hundreds ofthousands of dollars.
But ironically, in that case, upto our point, the contracting
party had protected itself witha document that the court could
and did enforce.

SPEAKER_00 (15:51):
And there's the old adage, anybody can sue anybody
over anything.
But as you point out, in thatcase, it did have a relatively
happy ending and that the courtupheld the reasonable
requirements.

SPEAKER_02 (16:03):
Happy ending for the good guys.
That's right.

SPEAKER_00 (16:06):
Well, Searle, it's been a pleasure speaking with
you this afternoon.
Thanks for coming in and sharingyour knowledge and wisdom on all
of these topics.
And I hope that this messagegets through to those listening
and provides some guidance inany difficult situations they
might encounter.

SPEAKER_02 (16:22):
But George, if everybody were to listen to me,
what would the litigators do?

SPEAKER_00 (16:26):
Well, that's for another day.

SPEAKER_02 (16:28):
Okay.
We'll look forward to that.
Thanks very much.
Thanks, George.

SPEAKER_01 (16:34):
All right, everyone.
Thank you so much for joining uson this episode of the Gordon
Feinblatt podcast.
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Please don't hesitate to reachout.
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(16:55):
other relevant materials will beavailable to you in the show
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And until Until next time, takecare.